Mci Case

MCI Communications Corp., 1983

Students:

Kausik Ash |

Javier Echave |

Trang Ho |

Sarah Nash |

Ayse Zeynep Saka |

Raj Sambasivan |

1. How has MCI financed its need in the past? Why did MCI make the financing choices it did? In which sense has the situation changed? Describe briefly the market in which MCI competes at the time of the case.

MCI financed its need in the past through the use of Convertible Cumulative Preferred Stock, Straight Subordinated Debentures and Convertible Subordinated Debentures.

Securities Type | When ($ mil) | Why |

ConvertibleCumulative Preferred Stock | Dec78 (25.8)Sep79 (63.1) Oct80 (46.7) | Need for equity without affecting common sharesDividend on the preferred stock 85% tax deductible, price on the preferred stock rose with each offeringNo significant loss of tax benefits since MCI’s earnings were still sheltered by past carry forward losses |

Straight Debentures | Jul80 (50.5)Apr81 (102)Sep82 (209) | To increase D/A ratio and leverage tax benefit of interest on debtMove from short term to long term debt |

Convertible Subordinated Debentures | Aug81 (98)May82 (246) Mar83 (393) | Cheaper debt (in mar’83 a 7.75% interest rate compared to 13% - a 500 basis point spread compared to debtSignificant growth option allowing debtors to participate in upside Forced conversion (call provision) allowed MCI to convert to equity if neededAug 81 and May82 were already converted without diluting common shareholders, while getting cheaper debt compared to market. |

Change in Situation:

MCI’s stock price has shown significant growth allowing MCI to dictate a lower interest rate for its Convertible Bonds.

Market in Which MCI competes:

1) Settlements of antitrust suit between AT&T and Justice Department in Jan 82 making AT&T compete on more or less equal basis with MCI.

2) Initial increase of about 80% in MCI access charges in 1984 – resulting in loss of its cost advantage over AT&T

2. How much...